Melanie Cao’s research interests include equilibrium asset pricing, derivatives valuation, financial market liquidity, corporate finance concerning bank loan, initial public offering and executive compensation.
2009-2010, 2006-2007, 2005-2006 Merit Award for excellence in teaching, research and service, Schulich School of Business, York University
2008 Outstanding Paper Award at the 3rd Annual International Conference on Asia-Pacific Financial Markets
2005 - 2006 Nominated for Teaching Award at Schulich School of Business, York University.
1996 Best Paper on Derivative Securities in the Finance Division at the Administrative Sciences Association of Canada’s Conference
Melanie Cao, Batur Celik (2021), "Valuation of Bitcoin Options", The Journal of Futures Markets, 42(7), 1007-1026.
We propose an equilibrium valuation model for bitcoin options by extending Cao. Bitcoin is interpreted as a foreign currency in a small open economy where money supply and aggregate dividend are exogenous. The equilibrium bitcoin prices increase with diffusive and jump risks of these two exogenous factors. Analytical option pricing formulas are obtained with Merton’s model as a special case. Static analysis reveals that a bitcoin call (put) option value increases (decreases) with the money supply growth rate. Numerical analysis shows that all risks lead to a positive premium in option prices relative to the Black–Scholes model.
Cao, M., Gold, N., Huang, H. and Wang, Q. (2017), "Liquidity and Volatility Commonality in the Canadian Stock Market", Mathematics-in-Industry Case Studies, 8(7), 1-20.
This paper studies liquidity and volatility commonality in the Canadian stock market. We show that five various liquidity measures display strong evidence of commonality at both market-wide and industry specific levels. Our findings extend the results of previous studies in liquidity commonality, and show that even after controlling for individual determinants of liquidity such as price, volume, and volatility, liquidity commonality remains. In addition to demonstrating liquidity commonality, we also investigated the causal relationship between liquidity and volatility. Our evidence indicates that depth, proportional effective spread, and liquidity changes predict volatility changes for bid-ask spread, depth, and proportional effective spread.
Avanzi, B., Cao, M., Treville, S. and Trigeorgis, L. (2014), "Why Don’t Firms Reward their CEOs with Relative Compensation", International Journal of Advanced Research in Business.
The existing economic theories on managerial compensation renders the relative performance evaluation (RPE) as the desirable mechanism to reward CEOs. However, in reality, very few firms use the RPE scheme, which constitutes a puzzle as noted by Murphy (1999) and others. This paper sheds some light on this puzzle. I show that the RPE scheme is not always the desirable mechanism in a competitive market with multiple firms and multiple agents. In other words, the apparent desirability of the RPE mechanism is a result of simplistic model setup. Once realistic features are built into the model, the equilibrium could be compatible with either an absolute performance evaluation scheme (APE) or an RPE scheme. Therefore, that the preponderance of firms use APE is not necessarily a puzzle at all. I reach the above conclusion via an equilibrium model within which the optimal incentive contract is derived in a market with many firms and many CEOs. The main innovative features absent in the existing models include the inter-firm interactions through the CEOs’ endogenized reservation utilities and the possibility for CEOs to quit. In this rich setting, I show that either form of the compensation scheme can prevail depending on the economic condition. As a by-product of the inquiry, I also show that a mixture of APE and RPE can actually better motivate the CEO and therefore enhance the firm’s profit than either of the simple form.
Cao, M. and Wang, R. (2013), "Optimal CEO Compensation with Search: Theory and Empirical Evidence", Journal of Finance, 68(5), 2001-2058.
We integrate an agency problem into search theory to study executive compensation in a market equilibrium. A CEO can choose to stay or quit and search after privately observing an idiosyncratic shock to the firm. The market equilibrium endogenizes CEOs’ and firms’ outside options and captures contracting externalities. We show that the optimal pay‐to‐performance ratio is less than one even when the CEO is risk neutral. Moreover, the equilibrium pay‐to‐performance sensitivity depends positively on a firm’s idiosyncratic risk and negatively on the systematic risk. Our empirical tests using executive compensation data confirm these results.
Project Title Role Award Amount Year Awarded Granting Agency Project TitleCredit ratings for small and medium enterprises RoleCo-investigators Award Amount$240,000.00 Year Awarded2014-2017 Granting AgencyThe Mitacs of Canada Project TitleCommercial Mortgage Backed Securities RolePrincipal Investigator Award Amount$80,000.00 Year Awarded2013-present Granting AgencyMITACS of Canada Project TitleApps for Financial Services RolePrincipal Investigator Award Amount$60,000.00 Year Awarded2013-present Granting AgencyMITACS of Canada Project TitleImpact of Holding Restrictions on the private valuation of company stocks and options RoleCo-Investigator Award Amount$69,000.00 Year Awarded2006-2009 Granting AgencySocial Sciences and Humanities Research Council - Standard Research Grant Project TitleSearch for the optimal executive compensation contract: theoretical and empirical investigations RolePrincipal Investigator Award Amount$43,000.00 Year Awarded2005-2008 Granting AgencySocial Sciences and Humanities Research Council - Standard Research Grant Project TitleFirm’s Financing Decisions and Weather Risk Management RolePrincipal Investigator Award Amount$29,000.00 Year Awarded2000-2003 Granting AgencySocial Sciences and Humanities Research Council - Standard Research Grant Project Title RolePrincipal Investigator Award Amount$ Year Awarded2000-2002 Granting AgencyYork University Schulich School of Business Research Grant Project Title RolePrincipal Investigator Award Amount$5,000.00 Year Awarded1998-2000 Granting AgencySocial Sciences and Humanities Research Council- Internal Seed Grant Project Title RolePrincipal Investigator Award Amount$ Year Awarded1997-2000 Granting AgencyThe Edith Grant for Research at Queen's University Project Title Role Award Amount$ Year Awarded1997 Granting AgencyQueen’s University Research Initiation Grant